Madoff, other felons say markets are unfair

MarketWatch interviews five Wall Street felons, including three in jail

By

RonaldD. Orol

WASHINGTON (MarketWatch) — Faced with a rash of insider trading in the markets, federal prosecutors and securities regulators in recent years have stepped up efforts to crack down on violations.

But insider trading and market fraud persist, perhaps at epidemic levels. Even though the Securities and Exchange Commission has brought more insider-trading actions in the past three years than in any three-year period in the agency’s history, and even though the U.S. attorney in New York City has convicted 73 people in insider-trading cases since 2009, the crime remains all too common.

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Bernie Madoff.

That’s what MarketWatch found in a series of interviews with people convicted of insider trading and fraud. These felons painted a picture of an unfair market driven by widespread cheating that favors those with privileged information and expensive technology. The cheating also hurts individual investors and retirement savers trying to follow the rules of the road and produces a deeply unfair market environment.

MarketWatch reporters conducted a series of in-depth interviews with ex–investment brokers and others who lost their trading licenses and are either in prison serving multiyear sentences or have done their time in the slammer and now advise others on what not to do.

MarketWatch found that insider trading may be one of the most common crimes on Wall Street and one of the least prosecuted. And that was only the beginning. MarketWatch discovered that the problem for retail investors goes far beyond a failure of regulators to identify insider-trading violations.

The financial criminals we spoke with said that not only do many investors routinely skirt insider-trading laws, but the explosion of computerized high-speed trading in recent years has made the situation even more unfair for the retail investor.

Those retail investors should be careful when relying on audited financial statements because accounting fraud continues unabated, according to one interview. Accounting-fraud cases are complex, and regulators don’t have the resources to enforce the law effectively, according to one felon.

As one fraudster put it to MarketWatch, the Securities and Exchange Commission has roughly 4,000 employees to regulate the financial industry while there are 35,000 cops in New York fighting blue-collar crime.

Insider trading may be one of the most common crimes on Wall Street and one of the least prosecuted.

Bottom line: The markets aren’t fair for retail investors. Regulators at the U.S. attorney’s office declined to comment. However, Daniel Hawke, chief of the SEC enforcement division’s market abuse unit, defended the agency’s actions, arguing that it is difficult to identify how much insider trading is going on that regulators aren’t catching.

He said felons behind bars are not going to be credible witnesses because, having been successfully prosecuted, these are people with an ax to grind against the government.

“There was blatant deception implicit in their crimes,” Hawke said. “I don’t think it is credible for someone convicted of insider trading or securities fraud to talk about the ineffectiveness of the government in investigating or prosecuting insider trading.”

Nevertheless, MarketWatch spoke with four ex-brokers, three of whom are in prison with years to go on their sentences and a fourth who is out of prison and advises others about to enter custody.

To get a perspective on the world of accounting fraud, MarketWatch also spoke with a former chief financial officer of a publicly traded company behind a well-known criminal enterprise.

Among them was the poster child for brokers-turned-felons: Bernie Madoff. The perpetrator of a $50 billion Ponzi scheme — the largest in history — explained that retail investors can avoid being scammed by fraudsters like him by putting money in an index fund. (If only he had offered that advice earlier.)

On a smaller scale, MarketWatch spoke with the so-called Bernie Madoff of New Jersey, an ex-broker who is now behind bars for running a Ponzi scheme. He said insider trading is impossible to stop and that retail investors will never be able to compete with the pros unless they splash out for sophisticated, and expensive, trading tools.

An ex–New York stockbroker and hedge-fund manager currently serving 16 years for defrauding investors said insider trading is a black hole that leaves regulators in the dark. A former Wall Street broker who spent 12 years as a broker at big New York investment banks before pleading guilty to wire fraud says no one on Wall Street can be successful without cheating.

For a different perspective MarketWatch turned to a felon and former chief financial officer of Crazy Eddie Inc., a criminal business passing itself off as a New York electronics retailer in the 1980s. This felon explains why he thinks “audit” is a fraudulent term.

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